US fiscal reform will impact Mexico: Cepal

Mexico has limited fiscal space in which to move, says head of UN economic agency

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Thursday, December 21, 2017

Fiscal reform under way in the United States will have an impact on the Mexican economy, above all because Mexico has little room to adjust its own tax rates, the head of a United Nations economic commission said yesterday.

“Mexico has limited fiscal space because its rate is very low, while tax evasion and avoidance are high . . .” said Alicia Bárcena, executive secretary of the Economic Commission for Latin America and the Caribbean (Eclac). The corporate tax rate in Mexico is 30%.

The lower house of the United States Congress yesterday approved the tax reform bill for the second and final time, which includes tax cuts of almost US $1.5 trillion over 10 years. Corporate tax will be cut from the current rate of 35% to just 21%.

“If corporate tax is lowered in the United States . . . we’ll have to analyze what might happen, but obviously there’s going to be an impact,” Bárcena said at a press conference in Mexico City while presenting the commission’s Social Panorama 2017 report.

However, the Eclac chief added that it’s not necessary for Mexico to react immediately to its northern neighbor’s lower tax rate because the real rate will probably be higher once state-based taxes, which may increase, are considered.

Bárcena also said that Mexico had other advantages that differentiated it from the U.S. economy.

“. . . there are other factors that make Mexico attractive, in relation to its location, resources, work force [and] value chains,” she said, although she added that “an analysis of corporate taxes will have to be done because there is indeed an impact.”

Another factor that may go some way towards buffering the impact of the reduced U.S. tax rate is the creation of five new Special Economic Zones (SEZs).

The director of the federal agency overseeing their development said earlier this month that the zones represent “an overwhelming opportunity” for investment whatever happens with the United States with regard to its free trade agreement with Mexico and tax reform. The zones will have a zero tax rate for the first 10 years.

In addition to tax reform, Eclac also recognized that renegotiation of the North American Free Trade Agreement (NAFTA) will likely have an impact on the Mexican economy.

In a worst-case scenario, where the three countries don’t manage to reach consensus and the treaty is terminated — as threatened repeatedly by President Donald Trump — Mexico will see a 1.1% reduction in its gross domestic product (GDP), Bárcena said.

Poverty would also increase, she explained, adding that while levels have gone down over the past 10 years that trend could be broken this year because of the impact that September’s twin earthquakes and this year’s hurricanes had on the country.

Poverty levels across Latin America have gone up over the past two years, according to the Social Panorama report, after more than a decade of declines in most countries, and are expected to remain steady this year.